Investing News

This week we look
at some interesting,
under-the-radar
breakouts in the
economy and markets.
The breakout in
economic surprises is
a positive sign for the
stock market and
cyclical sectors.
The breakout in
valuations suggests only
potential moderate
gains for stocks in the
near term.

We expect mid-single-
digit returns for the S&P
500 in 2016, consistent
with historical
mid-to-late economic
cycle performance,
driven by a second half
earnings rebound.
Key risks include a
policy mistake from
Washington or the Fed,
geopolitics, and a
surprising pickup in
inflation. Bouts of
volatility are likely

The earnings recession
will likely continue with
second quarter results,
which will begin to be
reported this week.
Better times may lie
ahead: U.S. economic
growth has started to
pick up, the drags from
the U.S. dollar and oil
are starting to abate,
and Brexit appears
unlikely to hurt U.S.
companies much.

The Brexit’s
impacts on earnings and
U.S. stocks may be
limited; we maintain our
2016 year-end S&P 500
forecast for mid-singledigit
returns.* However, uncertainty in
Europe, seasonal
weakness, and the U.S.
presidential election

We look at three reasons
to be fearful of future
economic and stock
market returns, and
three reasons why the
fears may be overblown.
In the face of some
recent bad news and
growing investor
worries, the S&P 500 is
still only 2.8% away
from a new all-time high.

The United Kingdom
votes on June 23 on
whether to remain or
exit the European
Union (Brexit).
Financial markets had
been confident the
U.K. would remain,
though very recent
polling data have
created uncertainty.​

This week we take a look
at the “GAAP gap,” the
gap between reported
and operating earnings.
The gap today is largely
energy driven, and we see
little in earnings data that
might indicate a broader
market downturn.

Despite the modest size of the energy sector (typically less than 10% of
total market capitalization), crude oil and the broader stock market, as
measured by the S&P 500, have had very high correlation during the past
few months.

stocks to navigate the
eventual start of the
Fed rate hike cycle with
the benefit of a
continued U.S.
economic expansion
and earnings gains in
the months ahead.
Although Fed stimulus
and low interest rates
have played a role in
fueling the current bull
market, earnings
growth has been a far
bigger factor.​

Fighting the Fed may be
a winnable battle for EM.
EM valuations are
compelling and, in our
view, have priced in a
fair amount of risk.
We see sufficient
upside potential to
maintain modest EM
equity allocations
despite significant
growth challenges.

This week we answer the
top 12 investor questions in
response to the S&P 500’s
12% correction.
We expect the U.S.
economic expansion and
bull market may continue
through year-end, despite
the latest stock market
correction and
China uncertainty.
We reiterate our forecast
for stocks to produce midto
high-single-digit returns
in 2015.

As a bull market matures
over the second half of an
economic expansion,
periods of increased market
volatility are likely to
become more common.
Periods of volatility bouts
will likely create a more
challenging environment for
investors, and in the short
term, sentiment can control
markets as investor
sensitivity to certain
risks spikes.
We believe the
macroeconomic
fundamentals and the
dynamism of American
corporations are likely
to drive further stock
market gains.

Expectations for the back to
school shopping season are
low, and this season may only
be flat versus last year.
Several consumer spending
tailwinds suggest the
consumer discretionary sector
may be poised to outperform
through year-end.

The additional supply
expected from Iran and the
slow response by producers
to reduce supply may
lengthen oil’s stay in the
$5 0– 60 range.
We have tempered our
previous enthusiasm for the
energy sector and at current
oil price levels view it as a
market performer.

Q2 earnings season may look
a lot like Q1 as companies
once again face the twin
drags of the energy downturn
and strong U.S. dollar.
Corporate America may
impress in other ways, such
as its resilience to the latest
Greece and China flare-ups.
As earning season
progresses, we will watch for
evidence that earnings will
accelerate in the second half.

The referendum result this
weekend throws Greece’s
future in the currency union
firmly in doubt.
Here we address the question
of whether the heightened
risk of a Greek exit from the
Eurozone might lead to
contagion for global markets.
We do not believe Greece is
another “Lehman moment”
and it may present an
attractive buying opportunity
for European equities.

We do not believe transports’
weakness is a signal of an
impending economic and
market downturn.
Historical data suggest
transports’ underperformance
may actually be signaling a
buying opportunity for the
S&P 500 rather than a sell.
We believe transports
present an attractive
investment opportunity for
the second half of 2015.

We believe corporate
America will provide a much
needed boost for the second
half — providing the seventh
year of positive returns in
2015, in the 5 – 9% range
we forecast.
Our forecast is based on
expected mid-single-digit
EPS growth for S&P 500
companies, supported by
improved global economic
growth, stable profit margins,
and share buybacks in 2015,
with limited help from
valuation expansion.

The upcoming ACA
Supreme Court decision
may create a buying
opportunity for the
healthcare sector.
We believe the odds favor
the status quo, meaning
that any selling pressure
related to the risk of
losing insured patients
may present a
buying opportunity.

European earnings have
surprised on the upside
while guidance has led
to rising estimates,
contributing to strong
recent performance by
European stocks.
Japan’s first quarter
revenue growth outpaced
both the U.S. and Europe,
while Japanese
companies beat revenue
forecasts at a solid rate.

Greece is unlikely to
maintain its debt
repayment schedule
without a resolution.
A default and a Greek exit
may add volatility to the
equity markets, but do not
appear to present a
systemic risk at this point.

This week we pay tribute
to David Letterman’s last
Late Show with our own
top 10 list: the top 10 keys
for stocks.
A potential snapback in
the U.S. economy is the
number one issue for the
stock market, but here we
list nine other issues that
will be important in
determining where stocks
go in the near term.

The S&P 500 is on track
to post year-over-year
earnings growth of about
2% in the first quarter — a
solid result considering the
significant drags from the
oil downturn and strong
U.S. dollar.
Healthcare led the upside,
followed by energy,
technology, and financials,
while industrials struggled.

We believe emerging
markets (EM) score well
when evaluated along
some of the same
criteria that NFL football
teams use to assess
potential draft picks:
speed, strength, value,
upside potential,
and character.
According to our
evaluation, EM scores
very well on the first
four metrics, and the
fifth — character — is
sufficiently discounted
in terms of policy
and corporate
governance risks.
EM may make a good
draft pick to add to
your portfolios.

Investors continued to
embrace risk this past
week as the Nasdaq
reached a new high
while peripheral
European bonds and
emerging market
equities rallied.
Regional economic
growth continues to
diverge but slowly moves
ahead, largely pushed by
internal demand and
supported by liberal
monetary policy.

The Russell 2000 Index
hit a fresh all-time high
last week (on tax day,
April 15, 2015) and has
outpaced large caps by
205 basis points (2.05%)
year to date.
Although valuations are
on the high side, the
factors that have driven
recent small cap
strength, in our view,
remain largely intact.
Small cap technicals
appear bullish,
with positive relative
strength and an upward
sloping 40-week
moving average.​

Regardless of whether
China hits its 7% GDP
target for Q1, its stock
market has already been
positive so far this year.
Despite strong recent
performance, Chinese
stocks may see
further gains.
We maintain our positive
view of broad EM, with a
preference for Asia.

A snapshot of
LPL Financial Research’s
views on equity, equity
sectors, fixed income, and
alternative asset classes.
This biweekly publication
illustrates our current views
and will change as needed
over a 3- to 12-month
time horizon.

We are initiating a master limited partnership (MLP) view (neutral/positive) and
introducing several new alternative investment categories.
Upgrading technology and industrials to positive and munis (int.) to neutral/positive.

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